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March 9, 2010

To Our Shareholders, Friends and Associates:

Your company cautiously noted signs of improving conditions in the second half of 2009. Positive third quarter trends continued into the fourth quarter, with every major book value performance driver again generating a positive after-tax contribution. After our quarterly shareholder dividend of 39.5 cents per share, book value per share increased a total of 81 cents, rising 2.8 percent above its third-quarter level:

• 5 cents from property casualty insurance underwriting profit
• 6 cents from life insurance operations
• 38 cents net from investment income, other than life insurance, and reduced by non-insurance expenses
• 71 cents net from realized capital gains plus the change in unrealized gains on investments
• and we paid to our shareholders 39.5 cents per share in dividends

With these contributions, year-end 2009 book value per share reached $29.25, up 13.6 percent from $25.75 at year-end 2008 and 22.5 percent from the first quarter of 2009 when the market bottomed. Our value creation ratio, which factors in both book value growth and shareholder dividends, was 4.2 percent for the fourth quarter. For full year 2009, the upturn in the investment markets helped push this ratio to 19.7 percent. Looking out five years, we continue to target an annual value creation ratio averaging 12 to 15 percent for the period from 2010 through 2014.

Our life insurance company is a steady profit source. The contribution from property casualty insurance operations remains constrained by conditions that will again challenge us in 2010. While two consecutive quarters of underwriting profit is a good sign, that profit was slim and bolstered by unusually low catastrophe losses in the second half. Our growth initiatives — mainly longer-term actions intended to gradually diversify our book of business — only partially offset the effects of market cycle and economic pressures. Fourth-quarter personal insurance premiums grew satisfactorily. Price declines narrowed for commercial accounts, with lower overall commercial premiums resulting from our efforts to write or renew only quality accounts that have a margin for profit and from recessionary impacts on our policyholders' businesses. Premiums generated from audits of general liability and workers' compensation policies decreased our revenues for the past two quarters, as audits of estimated payrolls and sales led to more premium refunds than adjustments for additional premiums.

Returning to positive signs, our pretax investment income rose in the fourth quarter, and we expect income on our restructured portfolio to continue growing in the coming quarters. Our fixed-maturity investment portfolio at year-end was 132.6 percent of our policy reserve liabilities, a conservative position that provides protection should interest rates rise, leading to lower bond values.

We welcome signs of better times to come, and at the same time, we're not letting down our guard. We are managing risk and stepping up the pace on initiatives that bring new opportunities to preserve and increase our financial and market strengths over time. You'll read inside about fourth quarter milestones including our entry into a new state, introduction of new policy administrations systems, broadening of our excess and surplus lines product portfolio and other actions to improve the service and expertise we bring to agents and policyholders.

Respectfully,

/S/ John J. Schiff, Jr. John J. Schiff, Jr., CPCU Chairman of the Board

/S/ Kenneth W. Stecher Kenneth W. Stecher President and Chief Executive Officer

This report contains forward-looking statements that involve potential risks and uncertainties. For factors that could cause results to differ materially from those discussed, please see the most recent edition of our safe harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in effect as of this report's initial publication date, please view this document as a printable PDF.

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